My Name Is Bond, Covered Bond!

The long-awaited amendment of the Act on Bonds has finally come into force. Its aim is to eliminate shortcomings of existing legislation causing legal uncertainty and to establish institutes already common in other countries.

It introduces a completely new concept of covered bonds which may be issued by banks only. The Act newly recognizes three types of covered bonds – mortgage covered bonds, public covered bonds and mixed covered bonds. Also, new institutes such as cover assets, cover pool and cover blocks have been introduced.

Cover assets are specified by the Act and have to be listed in the register of cover assets. Indisputable advantage of such register is the increased protection of assets on which no pledge be secured, transferred or established. Cover assets together with accessory assets form a covered pool are to be used for the coverage of debts.  Finally, the covered pool and the debts for which it is established (i.e. assets and liabilities thereof) constitute the covered blocks. A covered block shall then be monitored thoroughly by the issuer or by an appointed person, i.e. the monitor. The appointed monitor has the obligation to supervise the issuer in terms of due fulfilment of the issuer’s obligations and compliance with tests imposed by statutory provisions.

In relation to the covered bonds, significant changes have also been brought by a recent amendment of the Insolvency Act. Assuming the bankruptcy of the issuer, the cover pool shall no longer be part of the insolvency estate. An administrator shall be appointed by the Czech National Bank to ensure continuity and legal certainty. The administrator is not limited by the insolvency administrator when performing activities related to the cover pool. Also, provisions regarding the maturity of debts by declaration of bankruptcy shall not be applicable.

Further, the Act introduces the concept of security agent. The security agent in itself is not a novelty as it has been widely used. However, under the new legislation, the security agent is no longer required to own any bonds; the amendment rather presumes the non-existence of such ownership. The security agent shall now be a contractual third party acting on behalf of the owners of the bonds with the right to establish security. The concept of a security agent shall simplify the process of establishment of security and disposal thereof, especially in terms of registration with public registers or actions within possible insolvency proceedings, execution or enforcement of judgements. The security agent is obliged to ensure a necessary sale of security and subsequently to satisfy the claims of the owners of the bonds. The Act defines formal requirements such as a written agreement, and also provides a general scope of rights and obligations of the security agent. The concept of a security agent will rather be applied as far as corporate bonds are involved.

What could be considered to be a revolutionary provision affecting not only bonds is to be found at the very end of the amendment. The respective provision states that the concept of a security agent can be applicable even to secure debts not related to bonds. This means that the provisions regarding security agent could apply also to syndicate financing. However, it is still uncertain how and more importantly if the rather conservative practice of banks accepts this new concept for syndicated financing.

As seen above, many changes, improvements and specifications have been recently implemented and it is fair to say that not only those who deal with bonds shall be wary.

JS_GS

Mgr. Jitka Sytařová LL.M. / Gabriela Škvařilová

25.04.2019
Mgr. Jitka Sytařová, LL.M. / Gabriela Škvařilová
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